Could Funding Cuts be a Blessing in Disguise for the US Commercial Satellite Business?

The share prices of the US’s two main commercial satellite companies, GeoEye, Inc. (GEOY) and DigitalGlobe, Inc. (DGI), have seen their ups and downs, but mainly downs, over the past year. Both companies depend heavily on support from US defense and intelligence agencies. And reducing the government’s use of commercial satellite imagery is now a specific target for budget cutters. On top of this, US agencies have placed a number of their own satellites in orbit over the past year, so the number of government-owned alternatives to commercial satellites has grown.

Both companies have multi-billion, multi-year contracts with the US government. But these contracts are subject to annual renewals and so are likely to be cut significantly in 2012 and even more starting in fiscal 2013. There is still internal debate on the issue. The military tends to favor commercial imagery because it is cheaper and since commercial images are not classified, they can be shared freely with allies. US intelligence services tend to favor using their own satellites.

This expected loss of significant revenues from their major customer has depressed the prices of GEOY and DGI. But many believe these cuts could be a blessing in disguise.

While over the years both companies have been successful in growing their non-government and non-US revenues, the almost certain upcoming budget cuts will force them to become more creative and aggressive.

As to past successes, GeoEye, for example provides images for Google Earth. GeoEye also recently signed a contract with GE to provide the aviation industry with terrain and obstacle data for airports around the world.

The two companies’ more advanced satellites can see through vegetation, providing previously unavailable data for mining and oil companies. They can measure not only surface data of the world’s oceans, but also sub-surface temperatures to depths of at least 1,000 feet and measure marine life such as plankton.

Sophisticated geospatial analysis allows these companies to provide 3D images and measure changes between passes. Such capabilities can be useful for short-term threat assessments and for long-term measurements of the effects of climate change.

Given the level of geopolitical uncertainty; the insistence of states such as North Korea (see this satellite image by GeoEye) to engage in provocative actions; the needs of mining, fishery and farming interests; the need to quickly assess the impact of natural and man-made disasters; and so on – the market for the imagery of these satellites provide is almost endless.

Plus products such as Google Earth have greatly increased the public’s awareness of the availability of satellite imagery worldwide.

So the ball is now in the court of these commercial satellite companies. Will they flourish as reductions in US government revenues spur them to action or will they, and their shareholders, suffer as they go down without a fight?